Oil tumbled too but the dollar held its own against the euro, which has been weighed down in recent weeks over concerns that Greece might go bankrupt. Hong Kong's Hang Seng led stock markets lower, with a near 5 per cent dive.
The losses began Wednesday afternoon in the U.S. after the Fed announced a highly anticipated program to trade in $400 billion worth of short-term bonds for the same amount of longer-term bonds. The goal is to ensure low borrowing rates for a long period, thereby helping to stimulate the housing market and other economic activity.
The program — known as Operation Twist — was bigger than expected, but that seemed to work against the Fed's purposes: Investors took it as a signal that the central bank was growing more concerned about the economy. In its statement, the Fed noted "significant downside risks to the economic outlook, including strains in global financial markets."
"While Operation Twist was well anticipated perhaps the severe warning from the Fed that 'there are significant downside risks to the economic outlook' was not," said Jane Foley, an analyst with Rabobank International.
In morning trading in Europe, France's CAC-40 slid 4.2 per cent to 2,813, while Germany's DAX was down 4.2 per cent to 5,238. The FTSE index of Britain's leading shares was down 4.1 per cent at 5,072.
Wall Street was also set to open lower. Dow futures were 1.6 per cent lower at 10,833 while the broader Standard & Poor's 500 index futures fell 1.7 per cent to 1,136.
The euro slipped 0.7 per cent to $1.3486 as the dollar garnered support through its widely-percieved status as a a safe haven in times of financial turbulence.
Europe's single currency, which is used by 17 countries, is also being dragged down by concerns over Greece, which is currently in talks with its creditors about whether it has done enough to get the next slice of its bailout. If Athens doesn't get the €8 billion ($11 billion) by mid-October, it will run out of money.
A Greek default would be disastrous for an already suffering eurozone.
On Thursday, there was more bad news about the state of the eurozone economy there, with a closely-watched survey from financial information company Markit indicating potential recessionary conditions.
Markit's monthly purchasing managers index — a gauge of business activity — fell to 49.2 in September, its lowest level since July 2009, from 50.7 the previous month.
"The fall in the eurozone composite PMI below the theoretical 50 'no-change' barrier provides the strongest sign yet that the region is on the cusp of a recession," said Ben May of Capital Economics.
A recession will only make it harder for Europe's heavily indebted countries to pay down their debts since it effectively means their governments are taking in less income.
Fears of a recession have driven down oil prices, which typically rise when economies are humming and their energy demands are increasing.
Benchmark oil fell a whopping $3.00 in electronic trading on the New York Mercantile Exchange to $82.92. Brent crude was down $2.75 to $107.61.
Earlier in Asia, stocks also fell. Japan's Nikkei 225 dropped 2.1 per cent to close at 8,560.26. South Korea's Kospi slid 2.9 per cent to 1,800.55. Australia's S&P/ASX 200 was 2.6 per cent down at 3,964.90.
Hong Kong's Hang Seng saw the biggest fall, diving over 900 points, or 4.9 per cent, to close at 17,911.90.
In mainland China, the Shanghai Composite Index closed down 2.8 per cent at 2,443.06.
AP Business Writer Pamela Sampson contributed to this report from Bangkok.